Beware the Break in the Chain
One aspect of the current economic downturn is the strain on supply chains, which in some cases are reaching breaking point. This has been illustrated this week with news that retail success story Superdry has reported a dip in half-year profits after being hit by problems at a warehouse that affected supplies of its clothing.
It is particularly acute in this recession, because over the past 15 years businesses globally have shifted to a low stock, just-in-time model of supply. This is a sound business model in benign economic conditions, because businesses can achieve greater efficiencies and cost savings.
However, it has come at a cost. Exclusivity contracts and tough pricing have forced many suppliers to become leaner, more reliant on volume ordering and, as a consequence, more vulnerable to economic downturn.
The outcome is that the buyer’s risk has become the weakest link in the supply chain. The failure of one link can mean increased management time, disruption, delay, inefficiency, lost business and increased costs.
Failure can also result in penalties and breach of contract claims from customers and, possibly, ‘ransom’ payments from the insolvent supplier – especially if its role in the supply chain is critical to the purchasing business.
There are ways to spot the early signs of failure in the supply chain. Look out for missed deliveries, requests for deposits or payment up front, unexpected price rises or attempts to renegotiate pricing or terms, and silence and aversion tactics.
A reduction in credit insurance cover, county court judgments and winding-up petitions are also clear indicators of a business in trouble.
Prior to any insolvency and, indeed, from the start of the relationship, the customer should ensure that it is dealing on robust contract terms. Wherever possible, the customer should also conduct ongoing due diligence, systematic risk assessment and contingency planning which may prove invaluable in the event of a supplier becoming insolvent.
If a supplier goes bust, the first thing to establish is whether the business wishes to continue dealing with it. If trading is to continue, an insolvency practitioner (IP) will seek to exclude off-set against payment of further supplies, and the cost of securing supply may involve price rises or ‘loss sharing’ payments.
It is worth considering alternative strategies such as acquiring the supplier’s business, if this would achieve a better outcome than costly support.
If termination is preferred, the focus should be on enforcing any proprietary claims to paid-for stock and other materials. If there is any other security, this will also be key to mitigating potentially negative exposure.
In this economic climate it is likely to be those businesses that have prepared for the worst that will avoid becoming hostages to the misfortunes of the weakest link in the supply chain.
Simon Morris can be contacted at Stones Solicitors LLP on 01392 666777. More information is available by logging on at www.stones-solicitors.co.uk.